In June, we wrote about the significant prepay differences observed between loans with full inspection/appraisals and loans with property inspection waivers (PIW). In this short piece, we revisit these relationships to see if the speed differentials have persisted over the previous four months.

From an origination standpoint, PIWs continue to gain in popularity and are beginning to approach half of all new issuance (blue line). For refi loans this figure approaches 60% (green line).

Graph 1: Percent of loans with property inspection waivers, by balance. Source: RiskSpan Edge

Performance

Broadly speaking, PIW loans still pay significantly faster than loans with appraisals. In our June report, the differential was around 15 CPR for the wider cohort of borrowers. Since that time, the relationship has held steady. Loans with inspection waivers go up the S-curve faster than loans with appraisals, and top out around 13-18 CPR faster, depending on how deep in the money the borrower is.

Graph 2: S-curves for loans aged 6-48 months with balance >225k, waivers (black) vs inspection (blue). Source: RiskSpan Edge. 
 

The differential is smaller for purchase loans. The first chart, which reflects only purchase loans, shows PIW loans paying only 10-12 CPR faster than loans with full appraisals. In contrast, refi loans (second chart) continue to show a larger differential, ranging from 15 to 20 CPR, depending on how deep in the money the loan is.

Graph 3: Purchase loans with waivers (black) versus inspections (blue). Source: RiskSpan Edge.
Graph 4: Refi loans with waivers (black) versus inspections (blue). Source: RiskSpan Edge.

We also compared bank-serviced loans with non-bank serviced loans. The PIW speed difference was comparable between the two groups of servicers, although non-bank speeds were in general faster for both appraisal and PIW loans.

Inspection waivers have been around since 2017 but have only gained popularity in the last year. While investors disagree on what is driving the speed differential, it could be as simple as self-selection: a borrower who qualifies for an inspection waiver will also qualify upon refinancing, unless that borrower takes out a large cash-out refi which pushes the LTV above 70%[1]. In any event, the speed differential between loans with waivers and loans with full inspections continues to hold over the last four months of factor updates. Given this, appraisal loans still offer significantly better prepay profiles at all refi incentives, along with a slightly flatter S-curve, implying lower option cost, than loans with inspection waivers.

If you are interested in seeing variations on this theme, contact us. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.


[1] No-cash-out refis qualify for waivers up to 90% LTV.